AUD/USD and NZD/USD Fundamental Daily Forecast – Next Major Move Hinges Upon Powell’s Remarks on Friday

The Australian and New Zealand Dollars are edging slightly lower on Wednesday, giving back some of yesterday’s gains that were fueled by a wicked two-sided trade.

The Aussie and Kiwi popped higher on Tuesday after the release of a weaker-than-expected U.S. business activity report, but gains were limited and prices retreated late yesterday and early today after more hawkish remarks from a Fed official.

This choppy price action was educational because we likely learned the meaning of “data dependent”. This type of price action is likely to continue until the Federal Reserve makes its interest rate decision on September 21. However, Friday’s keynote speech by Federal Reserve Chairman Jerome Powell at Jackson Hole, Wyoming could offer some clues as to the outcome of the Federal Open Market Committee’s (FOMC) decision.

At 02:41 GMT, the AUD/USD is trading .6915, down 0.0014 or -0.20% and the NZD/USD is at .6197, down 0.0017 or -0.27%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.61, up $0.50 or +0.73%.

Uncertainty Ahead of Powell’s Jackson Hole Speech

Ahead of Powell’s speech at the central bankers’ symposium at Jackson Hole, trader sentiment is mixed after leaning toward the super-sized hike earlier in the week. The closely watched FedWatch Tool has the chances of a 50-basis-point rate hike sitting at 50% and the probability of a 75-basis point rate hike at 50%.

On Tuesday, the U.S. manufacturing and services PMI came in well below expectations which is raising concerns about the strength of the economy and supporting the notion that Powell might deliver a speech calling for a slower pace of interest rate hikes.

On the other hand, Powell may join the ranks of several Fed officials and call for the continuation of aggressive rate hikes. This includes Minneapolis Federal Reserve Bank President Neel Kashkari, who said on Tuesday that his biggest fear is that the U.S. central bank misreads the extent and persistence of price pressures and will need to deliver even more aggressive rate hikes to control inflation.

Aussie Drawing Support from European Energy Crisis

The Aussie is drawing indirect support from a steep drop in the Euro, which is getting hammered by an energy crisis in Europe.

Australia is a net exporter of energy and high prices for liquefied natural gas globally have contributed to a run of record trade surpluses this year. The huge rise in European energy prices is helping to generate some of the surplus because of Australia’s aggressive sale of natural gas to the Euro Zone.

Short-Term Outlook

The Australian and New Zealand Dollars are likely to remain rangebound until at least Friday when Powell is scheduled to give his speech. At this time both currencies are being underpinned by expectations of 50 basis-point rate hikes by their respective central banks in September. However, the Aussie and Kiwi could feel renewed selling pressure after last week’s steep declines if Powell’s speech is hawkish.

If Powell talks about the need for aggressive rate hikes to slow down the rise in inflation then investors are likely to move money into the U.S. Dollar. Furthermore, further signs of a global recession could make the greenback an attractive safe-haven asset.